BCSD CEO: Putting Value on Climate Change Risk

With the 25th United Nations Climate Change Conference fast approaching, private sector action will be at the forefront of discussions as global emissions reach record levels, disrupt air quality, weather patterns and long-term economic welfare.

According to a UN climate report released on Tuesday (November 26), global emissions continue climbing at dangerous levels. Over the past 10 years, global emissions have ticked up 1.5 percent each year.

“The summary findings are bleak,” the report said. “Countries collectively failed to stop the growth in global emissions, meaning that deeper and faster cuts are now required.”

Taking place in Madrid, Spain, between December 2 to 13, the UN Climate Change Conference will discuss transitions to renewable energy sources, among other topics, ahead of the next Paris Agreement deadline in 2020.

As part of the agreement, countries will convene to review their progress in cutting greenhouse gas emissions.

Ahead of the upcoming conference, the Investing News Network (INN) spoke to Andrew Petersen, CEO of the Business Council for Sustainable Development Australia (BCSD), about what it means to put a value on climate risk. Along with this, Petersen talks about how environmental, social and governance (ESG) investing principals are impacting company disclosures, accountability and sentiment on driving action on climate change.

The interview has been edited for clarity and brevity. Continue reading for more of what Petersen had to say.

INN: Can you talk more about putting a value on climate risk and what this means? 

AP: It’s a timely question since the task force on climate-related financial disclosures was convened following the 2015 request by the G20 finance ministers.

Since the release of the report by Central Bank Governors, with their final recommendation in June 2017, we’ve seen that has had a vital role in mobilizing finance towards products and services, and now solutions designed by business, to actually support the transition to a low-carbon economy.

What’s interesting is that it is transnational in nature. It’s cut across all borders. It’s cut across all nations, all countries, individual policy. It has sent a very powerful baseline for business and finance to bring about a proper or true accounting for climate risk on business. I would include Australia and Australian business in that as well.

In the years since, there’s been the growing recognition of the importance of climate related financial disclosure. We’ve seen quite a number of calls now for coordinated efforts to advance this particular agenda worldwide. Most particularly, at the beginning of October in a conference that was held in Japan called the Task Force on Climate-Related Financial Disclosures (TCFD) Summit 2019, Mark Carney, the governor of the Bank of England, was looking to businesses to accelerate their work in relation to climate risk.

It’s become quite an accelerated process really around this question of putting value on climate risk.

Interestingly, we already have about 850 businesses with a combined market cap of US$9 trillion that are now TCFD supporters.

INN: What is involved within these accountability measures within financial disclosures? 

AP: Let’s look at the endpoint, rather than the beginning point. I think, from our perspective at BCSD, we would very much think that a redesigned financial system is going to be founded upon three crucial components on the climate.

The first is we’re going to have to have well-run companies that now embed, embrace and utilize ESG information to drive decision-making and develop, as a result, products and services to deliver a more sustainable society. It’s utilizing disclosure information across the ESG landscape to drive that decision making.

The second is that the capital markets themselves, ultimately, will need to accelerate how they properly value these sustainable business practices. Ultimately, it makes it more problematic and difficult for those who don’t manage ESG risk and opportunity to actually succeed in the marketplace because money will follow success.

The third is that, in the financial system, they’re going to really need — and this is the big call out at the moment — enough capital. They need sufficient capital to really mobilize and address the sustainable development goals under the G20 agenda, and also deliver on a 1.5 degrees celsius world under the Paris Agreement.

At the summit in Japan, it actually led to an identification of a number of focus areas, including the need for businesses to actually start setting ambitious low-carbon transition targets, under either the current low-targets initiative or the 1.5 degree ambition pledge that the UN Global Compact had instigated, so that you begin to see businesses actually integrating climate into their governance processes.

This notion of disclosure, per se, can only work where it’s being utilized in a framework of governance process that actually embeds it, ultimately, into their decision making processes. That will then ultimately disclose their process to the mainstream capital markets.

INN: What are some of the leading companies that are taking action in sustainability?

AP: Well, it’s quite a broad question because you can either be talking about the development definition of value. There’s a lot of internal work going on around what the price of carbon or the price of water or the cost of resource allocation is going to mean to their business models.

In that regard, you’re seeing a lot of that played out, for example, in the automotive sector. Then the response being in products and now, ultimately, discussion around services. It’s more broadly mobility-realized related rather than necessarily a particular car.

You’ve also got regulation in the European Union that is causing those companies to address CO2 reduction at a fairly rapid rise. You’re also seeing the market and consumers in particular responding to that signal and wanting to see more products and services delivered as a result of that.

In terms of leading benchmark organizations, if you look at think tanks like Globe Scan and others, they regularly identify companies such as Unilever (NYSE:UL) or Natura or Patagonia internationally as leaders in the sustainability sphere, largely because of their business models and their approach, not necessarily because of the product or the service that they’re bringing to the market.

Then, recently out of the UN Climate Summit, we saw many business-led platforms of action, not just on climate change, but also more broadly on the implementation of the sustainable development goals.

And again, it was companies like Google (NASDAQ:GOOG), like Coca Cola (NYSE:KO), that were identified as wanting to take on the charter of responsibility for the realization of mobilization of the sustainable development goals.

INN: Which sectors are showing the slowest signs of adoption that you’re seeing? 

AP: Are we talking the Paris Agreement? Are we talking individual commitments under national policy making? It’s kind of a difficult one to answer, although there are fines based on the climate action front. The carbon disclosure project is published every year globally around progress by sectors on climate action in various jurisdictions including Australia. There are sectors such as tourism and pharmaceuticals, for example, that have to-date been the slowest sectors to announce commitments and drive action.

There are examples of innovation that are occurring, particularly around renewables in the resource sector in Australia. The question is, is that scale and that acceleration clearing at such a rate that we’re going to be able to respond to the commitments that were made under the Paris Agreement.

In Australia, I think the challenge is even more complicated by policy makers that are being unable or unwilling to commit to a unified national policy framework to decarbonize the Australian economy by 2050.

And, in much the same way as we saw Canada’s provinces responding in a patchwork way under a previous jurisdiction, other than being nationally led, that kind of action is now increasingly coordinated rather than competing.

INN: How would you describe investor awareness and activism in Australia specifically?

AP: In the case of investors, we have a very concerted and coordinated effort through the International Investor Group on Climate Change.

In Australia, we have the Australian counterpart Investor Group on Climate Change. They had been — in a coordinated fashion with the counterparts in Asia, Europe and the United States —under their umbrella of a trillion dollar investor interest.

They are asking questions of companies and calling out behavior when they see it as unrepresentative of substantive action on addressing climate change. They are developing a platform, the Climate Action 100+, that names and identifies those sectors and in some cases companies that they feel can be more active in their response to the Paris Agreement, in particular.

In Australia we’ve seen in very recent times, and I would say that’s over the last six months, the Australian superannuation community bringing forward and identifying those companies in their portfolios that perhaps are not as active in responding to the identification and disclosure of climate risk, let alone the actions in response to the challenges of our decarbonizing their business operations and ultimately their supply chain.

From the business perspective, it’s been quite interesting, because the signals as a result of the TCFD in 2017 were largely picked up by the Australian financial and corporate regulators.

Increasingly, we are seeing within the sustainability reports, particularly of publicly listed companies, either the commitment to the disclosure under the TCFD within the next 12 to 18 months, or they’re actually reporting their first cut on climate risk.

What we expect to see is an appreciation by the listed companies that the TCFD is an increasing measure of performance and governance information that needs to be provided to the market whereby the market itself and the investors are increasingly calling for that information to make better informed investment decisions.

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Securities Disclosure: I, Dorothy Neufeld, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.